Despite travel recovering, listed hospitality plays are unloved and may be privatised

SINGAPORE’S opening up along with that of many countries has led to a rise in international visitor arrivals, as well as hotel room and occupancy rates. Hotels here are also buoyed by the return of large scale events and relaxation of dining-in restrictions.

Perhaps because of optimism in the prospects for hospitality assets, some stapled security holders voted down the proposed privatisation of Frasers Hospitality Trust (FHT), which owns hotels and serviced residences in Singapore, the United Kingdom (UK), Australia, Malaysia, Germany and Japan, in September. The privatisation offer price of S$0.70 per stapled security was at above FHT’s book value.

Opponents of FHT’s privatisation may have scored a pyrrhic victory – as at Oct 14, 2022, FHT traded at 35 per cent below the privatisation offer price.

FHT is hardly alone in trading in the doldrums. As at Oct 14, 2022, major hotel groups Mandarin Oriental International and Shangri-La Asia traded at discount to adjusted net asset value (NAV) as at end-June of 53 per cent and 79 per cent respectively. The adjusted NAV takes into account market value of the hotels. The discount to NAV of Mandarin Oriental and Shangri-La Asia are 29 per cent and 58 per cent respectively.

As at Oct 14, 2022, the discount to end-June NAV of groups with large exposure to hospitality assets such as Amara , Banyan Tree , Far East Orchard , and Hotel Royal are 51 per cent, 52 per cent, 61 per cent and 58 per cent respectively. Bonvests traded at discount to end-June NAV of 56 per cent as at Oct 12, 2022.

Amid risk aversion among investors, stapled group CDL Hospitality Trusts (CDLHT) has seen the price of its securities come under pressure. Still, as at Oct 14, 2022, CDLHT traded at a superior book value multiple to the above groups of 0.8 times end-June NAV. CDLHT’s price per stapled unit is up 25 per cent versus its initial public offering price of S$0.83.

CDLHT’s portfolio as at end-June comprised 19 operational properties, including a total of 4,821 rooms and a retail mall, as well as one build-to-rent project in the pipeline with 352 apartment units, spread across eight countries.

Stapled trusts route

Among listed options, stapled trusts may be more efficient than companies as vehicles to own hospitality assets. Stapled trusts have high level of distribution of taxable income, which some investors can receive without tax deduction at source. While investor confidence in hospitality trusts was hit by the woes afflicting Eagle Hospitality Trust, which is now being wound up, this case may be seen as an aberration.

Perhaps, listed companies that own hospitality assets should undertake reviews to see if shareholder value can be created by using stapled trusts to hold such assets. Maybe property group, UOL Group , can emulate major developers City Developments Limited , Far East Organization and Frasers Property by setting up a listed hospitality trust. UOL, which owns 26 hotels and service suites with over 9,000 rooms, according to its latest results presentation, can set up a trust that offers scale.

Investors are comfortable investing in Singapore-listed trusts, and listed hospitality trusts can raise equity to fund growth. CapitaLand Ascott Trust (Clas), which is the largest hospitality trust in Asia-Pacific, raised aggregate gross proceeds of around S$170 million from a private placement of new stapled securities in August. The fundraising was largely to help fund the proposed acquisition of interests in serviced residences in France, Vietnam and Australia, rental housing properties in Japan and a student housing property in the United States.

Moreover, the income volatility of hospitality trusts is manageable as the trusts can earn revenue from master leases agreements where there is a fixed rent component and/or variable rent component, which is typically tied to revenue and/or operating profit. Adding student and/or rental housing assets helps boost the defensiveness of the portfolios of Clas and CDLHT.

If existing hospitality trusts bulk up and/or improve their free float, they might attract greater interest from institutional investors and trade better. As at end-June, Clas had total assets of S$7.6 billion, versus CapitaLand Integrated Commercial Trust , and CapitaLand Ascendas Reit , which had total assets of S$24.7 billion and S$17.4 billion respectively.

Privatisation route

However, stapled hospitality trusts are facing headwinds as investors cool to interest rate sensitive yield plays such as listed trusts amid rising interest rates. Perhaps, privatisation better solves the under valuation of listed hospitality plays.

In 2021, GL Limited and Fragrance Group were delisted from the Singapore Exchange due to privatisation exercises. The former’s key assets are hotels in the UK, while the latter is mainly a property and hotel group, which held various hotels in Australia and the UK.

Conditions may be ripe for privatisation of listed hospitality plays.

Firstly, the hospitality sector is recovering strongly in Singapore and many places. Emerging from the Covid-pandemic, people are keen to travel for leisure or business. Singapore’s international visitor arrivals grew for the eighth consecutive month in September. This year’s Formula 1 Singapore Grand Prix drew a record 302,000 fans, including many overseas attendees. Many Singaporeans are looking to take overseas year-end holidays.

Owners of hotels here can leverage Singapore’s position as a premier destination for leisure and business travel, which will be boosted by investments to upgrade the airport and improve attractions.

Secondly, hotels can cope with rising inflation. Unlike commercial properties, which have tenancy agreements that lock-in fixed rental rates for a prolonged period, hotels can revise room rates upwards fairly quickly.

Coming out of the Covid-pandemic, travellers may value health and safety as well as seek to be pampered. As such, hotels providing a premier experience can enjoy pricing power.

Thirdly, capital values of hotels may be well-supported in the investment sales market. Stamford Land Corporation entered into an agreement in October to sell the property that houses the hotel Stamford Plaza Auckland in New Zealand for NZ$152 million (S$123 million), which is 8.5 per cent above market valuation as at end-March. Stamford Land has also inked an agreement to sell Sir Stamford at Circular Quay, Sydney, Australia, which is mainly used as a hotel.

Parties will be careful with deployment of capital in a slowing economy, and the outcomes of privatisation offers can be uncertain. But a weak stock market may tempt some parties to make opportunistic privatisation offers, as battered investors may be more inclined to cash-in.